Missing out on telecom-cable manufacturers

CBS.MarketWatch.com

WASHINGTON (CBS.MW) -- With the explosion of the Internet, you'd expect manufacturers of copper and fiber-optic cables to be raking in the dough and seeing their stocks crest to new highs. After all, companies are racing to upgrade in-house wiring while phone carriers are rushing to modernize their networks.

Guess again.

Over the last half-year, many stocks of telecommunications-cable manufacturers have actually fallen in the dumps.

Consider: Superior TeleCom
sut
trades at around 13, down from its 52-week high of 39 1/2. General Cable
BGC, +0.00%
has shrunk all the way from a 52-week high of about 23 down to 7 after warning of a fourth-quarter shortfall. Anicom
anic
is hovering near 4 1/2 after hitting 11 earlier this year.

Beldon Inc
bwc
and Cable Design Technologies
CDT, -5.00%
have fared better than their brethren, but both have also suffered. Beldon closed at 18 Friday, down from its 52-week peak of 25. And Cable Design lost 2 Friday to close at 19 15/16, off its one-year high of 25.

The question is, have investors oversold these stocks? Some industry observers think the answer is yes.

Good reasons

To be sure, there are reasons why the stocks have been laggards as of late.

For starters, there's lots of competition but little difference in the products. As a result, manufacturers compete on costs, which has put downward pressure on prices.

At the same time, demand has temporarily slackened because companies and carriers are spending more money to ensure they are Y2K compliant before the end of 1999. Y2K, or the Year 2000 bug, refers to the inability of older computers to recognize the date 2000, substituting the year 1900 instead.

"All of these factors are hurting the market right now," said Catherine Bouchard, a telecommunications analyst at Frost & Sullivan.

To amplify results, the larger cable producers have engaged in a slew of acquisitions, triggering an industry-wide consolidation. Problem is, many acquirers have experienced difficulty in incorporating their new purchases. That's further hurt results.

One case in point is Superior TeleCom. The manufacturer warned in September that third-quarter and full-year profits, though up from the previous year, would not meet initial estimates. The warning caused the already-retreating stock to slip to a 52-week low.

Those troubles aside, the future for the industry looks bright. By early next year, many of the bigger manufacturers will have gotten a handle on their latest acquisitions, giving them greater efficiency and more economy of scale.

Corporations and phone carriers, meanwhile, are likely to accelerate orders for copper and fiber-optic cables once the Y2K problem passes. Demand for "bandwidth" and high speeds is not expected to abate for years.

"The market will rebound after 2000," Bouchard said."That's a sure thing."

Looking out to 2005, she estimates the market for high-end copper wiring will expand 3.1 percent a year and the market for fiber-optic cables by 21.7 percent annually.

Double duty

Since most of the bigger manufacturers now produce both kinds of products and are moving more and more into fiber optics, they'll likely be winners either way. "It's a wise decision to diversify," Bouchard said.

Analyst Jerry Labowitz of Merrill Lynch, for example, pegs Superior TeleCom, the No. 1 U.S. maker of copper wiring for the telecom market, as the company that might benefit the most.

Superior is shedding noncore assets, the proceeds of which it can use to expand its main businesses and to pay down its debt, he argued. The company is slated to earn $2.92 a share in 2000, up from $2.39 this year.

"We think that once we get beyond the tax-selling season and the company's short-term drag on earnings for the remainder of 1999 that this stock could be one of the best performers in our universe in 2000," Labowitz told clients

If Superior and other manufacturers are indeed headed for a rebound, investors who sold those stocks earlier or those trying to get in on a big industry turnaround might want to consider taking a look.

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